Non-franchise Firms Research Articles

Determinants Impacting Resale Premium Disparity When Selling a Small Business: A Predictive Non-Linear Approach

Small and entrepreneurial business activity worldwide continues to have a positive influence on economic growth and development. While there has been a plethora of studies on small business development, enhancement, and drivers for success, minimal research examines small business resales. Specifically, studies regarding the exit of small business owners through the selling of their business is sparse. More notable, no previous literature can be found concerning variables that optimize or impact the value of a small business resale. The purpose of this study is to identify variables that may have a positive influence on small business resale prices. Through non-linear analysis, the research identifies which variables most accurately predict an above average small business resale price. A dataset that examines 2,159 small business firms sold over a 10-year period is utilized to derive the study conclusions. Findings confirm that franchise firms receive a higher resale premium when compared with non-franchise firms. The analysis also supports that firms with greater than 25 years in business and that are engaged in Food/Restaurant (non-grocery) businesses receive a higher resale premium, as compared to any other firms in their respective categories.

Acquisitions and shareholders' returns in restaurant firms: The effects of free cash flow, growth opportunities, and franchising

Restaurant firms extensively expand through acquisitions. While acquisitions can be an efficient business strategy, the extant literature presented evidence showing that acquisitions can be value–increasing or –decreasing investments. However, why acquisitions increase or decrease firm value is not clear. Corporate finance and franchising theories collectively suggest that the value of acquisitions may depend on firms’ free cash flow capacities, growth opportunities, and organizational forms. The purpose of this study is to examine the concurrent effects of free cash flows, growth opportunities, and franchising on restaurant firms’ returns from acquisitions. The results showed that firms with high-free cash flows gain lower returns compared to firms with low-free cash flows, suggesting that acquisitions reduce underinvestment problems but also increase overinvestment problems. Franchising firms also gain lower returns compared to non-franchising firms; however, the availability of free cash flows exacerbates overinvestment problems in franchising firms. Theoretical and practical implications are discussed.

Is franchising an additional financing source for franchisors? A Blinder–Oaxaca decomposition analysis

Numerous studies have used agency theory (Jensen and Meckling, 1976) and capital scarcity theory (Oxenfeldt and Kelly, 1969) to explain franchising motivations. Although both theories may in part account for why firms choose to franchise, past studies have not seriously considered the potential relationship between franchising and capital structures. Using Blinder–Oaxaca decomposition analysis, this study examined the impact of franchising on short- and long-term debt leverage. The final sample included 191 restaurant firms from 1980 to 2015. Sixty-five firms were non-franchise firms, while 126 firms engaged in the franchising business. The results of the Blinder–Oaxaca decomposition analysis showed that franchising has a significant effect on decreasing long-term debts and confirmed that franchising plays an important role as an additional source of long-term capital. Consequently, the capital scarcity theory is supported as one aspect of long-term debt leverage. However, franchise restaurant firms have larger short-term debt than non-franchise firms, although it is merely marginally significant. This contradicts capital scarcity theory but is in accordance with some past studies (e.g. Norton, 1988; 1995). This implies that franchisors constantly need short-term capital to support franchisees.

Does franchising matter on IPO performance?

PurposeThis paper has two main purposes. First, this paper aims to examine whether pre-initial public offering (IPO) franchising activity of issuing firms is priced in the financial markets and results in pricing differential between franchising and non-franchising firms at the time of IPO. Second, the paper aims to find out whether firms with pre-IPO franchising achieve better post-IPO stock performance compared to non-franchising firms.Design/methodology/approachTo test research hypotheses, empirical models were developed and tested through ordinary least square regression analysis. Several data sources were used including Thomson One Banker’s SDC database, Compustat/CRSP and IPO prospectuses.FindingsThe paper provides further insights to the underpricing phenomenon surrounding IPOs and long-run performance of IPO shares subsequent to listing. Particularly, the study reveals that franchising firms underprice their issues to a higher degree compared to non-franchising firms, and franchising positively affects the post-IPO benchmark adjusted cumulative abnormal returns (CARs) over a three-year observation period.Research limitations/implicationsBecause the study tests the proposed hypotheses using data only from the restaurant industry, the research results may lack generalizability. Therefore, researchers are encouraged to test similar hypotheses using larger sample sizes from other industries.Practical implicationsThe study’s findings have important implications both for IPO issuers in positioning their offering and for IPO investors in comparing IPO stocks and forming long-run portfolios.Originality/valueThis paper contributes both to the IPO and franchising literatures by providing primary insights about how investors perceive pre-IPO franchising and incorporate their perception into their pricing at an IPO.

Revisiting the carry-over effects of advertising in franchise industries

PurposeDespite prior studies, little has been done to understand the advertising carry-over effect. The purpose of this study is to investigate the heterogeneous attributes of the carry-over effect by focusing on the differences between franchise and non-franchise firms.Design/methodology/approachThe data were retrieved from the Compustat database and annual corporate financial reports (10-K) for five representative franchise industries from 1980 to 2009. Ultimately, 185 firms were included and 1,592 firm-year observations were analysed. This study used a Panel VAR (Vector Autoregression) to examine the effects of advertising on firm performance. We can control endogenous effects using Panel VAR, which also allows us to control unobserved firm-specific heterogeneity.FindingsThis study found that advertising had no effect on sales growth or brand equity in the long run for non-franchise firms and further confirmed that non-franchise firms incur agency costs. In contrast, the effect of advertising on sales growth and brand equity was significant for franchise firms. A carry-over effect of advertising on brand equity was detected for franchise firms, but sales growth rapidly decreased after two years.Practical implicationsEven though franchise firms retain the carry-over effect of advertising on brand equity, franchisors should carefully monitor market trends and their sales growth because sales growth rapidly decreased after two years.Originality/valueThis study incorporated the concepts of the delayed response effect and the customer holdover effect to better understand the advertising carry-over effect. From the results, this study proposed a more detailed concept of carry-over effects for further studies. From this perspective, this study makes both academic and industrial contributions.

Evidence of franchising on outperformance in the restaurant industry

Purpose – The existing research finds a positive financial impact of franchising for relatively short time windows, usually less than ten years. As a result, these studies leave one critical research question unanswered: does franchising influence restaurant firms' financial performance consistently in the long term? The purpose of this paper is to address the research question and offer relevant managerial implications. Design/methodology/approach – This study uses and expands the models derived from Ohlson, from Amir and Lev and from Lev and Zarowin to address the financial impacts of franchise in the restaurant industry from a long-term and consistent perspective. Findings – Carrying out empirical tests over all ten-year testing windows that span 1980-2010 with quarterly data, this study finds that franchising is an effective mechanism to systematically and consistently outperform non-franchise firms in the long term and provides compelling empirical evidence to answer the research question. Further, l...

Franchising and firm financial performance among U.S. restaurants

Franchising has attracted the attention of retailing and entrepreneurship scholars in the past three decades, but evidence pertaining to how franchising affects financial performance is mixed and inconclusive. Thus, the question remains as to whether franchising firms exhibit better financial performance than non-franchising firms in the same industry. In order to find an answer to this question, our study compares the risk-adjusted financial performance of franchising versus non-franchising restaurant firms over the 1995–2008 interval, using five different performance measures: the Sharpe Ratio, the Treynor Ratio, the Jensen Index, the Sortino Ratio, and the Upside Potential Ratio. For each measure, the results revealed that franchising restaurant firms outperformed their non-franchising counterparts. Thus, we provide very robust evidence that franchising is superior on average in the restaurant industry, which can help explain the increasing popularity of franchising as a business form.

Does Franchising Create Value? An Analysis of the Financial Performance of US Public Restaurant Firms

It is commonly believed that the franchising method of distribution provides strategic and operational benefits to the companies that adopt it. These benefits should result in superior financial performance as compared to that of firms that do not use franchising. Yet, the empirical evidence of the effects of franchising on financial performance is sparse and mixed. The purpose of this article is to examine the empirical evidence of the impact of franchising on US publicly traded restaurant firms. The results provide some evidence that franchising firms create more market and economic value than do non-franchising firms in the US public restaurant sector.

Effects of restaurant franchising: Does an optimal franchise proportion exist?

Franchising has significantly affected the US economy, contributing to a rapid growth of its retail sales. To identify whether franchising influences a restaurant firm's financial performance, this study investigated (1) the profitability and intangible values of both franchise and non-franchise restaurant firms and (2) the effect of the combination of franchised and company-owned outlets of restaurant firms (i.e., franchise proportion). The results of this study showed that (1) franchise firms had significantly higher profitability than non-franchise firms and (2) the relationships between franchise proportion and firm profitability and intangible value were curvilinear (inverted U-shape), verifying the existence of an optimal franchise proportion. The results propose a possibility that restaurant franchisors could maximize their profitability and intangible value with an optimal franchise proportion when other variables held constant, implying that it is important to pay attention to the franchise proportion together with other management strategies.